Cut from the same cloth: Esprit tries on Zara for fashion makeover

HONG KONG/MADRID Sun Dec 1, 2013 4:10pm EST

People shop at an Esprit Outlet store in Singapore September 10, 2013. REUTERS/Edgar Su

People shop at an Esprit Outlet store in Singapore September 10, 2013.

Credit: Reuters/Edgar Su

HONG KONG/MADRID (Reuters) - Esprit Holdings' (0330.HK) chief is doubling down on a bet to fix the struggling clothing retailer he took charge of a year ago by revamping its existing business model and recreating it in the image of his former employer-now-rival, Zara.

Jose Manuel Martinez Gutierrez, 44, has stacked his management suite with veterans of Zara owner Inditex (ITX.MC), the world's biggest retailer whose model of rapidly changing fashion analysts say is among the best in the industry.

He also unveiled upgrades to technology and distribution to help his new hires get clothes designed, manufactured and on the racks in three to four months from the current seven to eight month time frame.

Now, all he has to do is get customers to buy the clothes.

The former McKinsey consultant and supply-chain whiz has laid the foundations for Esprit's recovery over the next 12-18 months with his nuts and bolts overhaul - he cut 10 percent of Esprit staff in the past year - but the real gauge of success will be in growing sales.

And in today's increasingly crowded market for high-street fashion, that means being able to adapt to the rapidly changing and divergent tastes of price-sensitive shoppers.

"We are mostly focusing now on improving all of our products' design and value for money, rather than on rethinking our sales strategy," Martinez told Reuters.

To succeed, he will need buy-in from every part of the business, ranging from Esprit's design and sourcing departments to its marketing managers.

"Our business figures are extremely far from our goals and expectations," he acknowledged in a letter to shareholders in Esprit's most recent annual report in October.

BRAND REVIVAL

While Esprit's plans may be similar to what worked for Inditex, it faces at least one problem its rival didn't.

Inditex owns most of its stores. Nearly a fifth of Esprit's stores and 60 percent of its sales area is franchised and not directly owned and run by the Hong Kong-listed brand which also has headquarters in Ratingen, Germany.

Feedback on which clothes are selling well takes longer. Franchises tend to be quicker to cut their losses by putting poorly selling items on sale - a potential problem for a company such as Esprit, which has franchise-run stores and self-branded stores in some of the same countries.

"It becomes more complex to manage inventory and pricing in a situation where a certain amount of internal competition has been created," said Jamie Merriman, a senior analyst financial research firm Bernstein Research.

Martinez said that decisions to open or close stores would be based on return on investment and profitability but that Esprit plans to keep its multi-channel distribution model.

Even if Martinez succeeds in dramatically shortening Esprit's production time, it's not clear whether speed alone will be enough to revive the brand.

H&M (HMb.ST), Gap Inc (GPS.N) and Uniqlo, the flagship brand of Japan's Fast Retailing Co Ltd (9983.T), are faster than Esprit at getting new products to market, and also cheaper. More expensive brands like family owned Max Mara and Gucci, owned by luxury conglomerate Kering SA (PRTP.PA), are also developing quicker turnaround times, as are luxury brands such as Prada SpA (1913.HK).

"Competition is very intense," said Aaron Fischer, head of consumer research at brokerage CLSA. "Esprit has high brand awareness but it needs to convert foot traffic into sales - and that requires good products. Right now, their products are quite poor compared with their peer group."

FAST-FASHION DNA

Esprit shares hit a record low of HK$6.95 ($0.90) on September 26, 2011 as the company struggled with loss-making stores and closing down its North American operations. The shares now trade over HK$16 ($2.06), but have remained well below historical highs for more than three years.

Yet only two of Esprit's 10 biggest shareholders have trimmed their stakes in the most recent reporting period, and those cuts were just 0.01 percent and 1.03 percent, respectively, according to Thomson Reuters data. Six of the top 10 investors increased their stakes and newcomer Tiger Global Management LLC bought a 5.09 percent stake.

"The company has been very transparent in communicating our strategy to the market, which includes our shareholders, and so far the overall response has been positive," Martinez said, responding to Reuters' questions via email.

Since joining Esprit in September 2012, Martinez, who spent nearly a decade running Inditex's supply chain, has hired at least five former colleagues as his top lieutenants, news of which propelled the company's shares each time.

His latest hire was at the end of October when Rafael Pastor Espuch joined as chief product officer, sending the shares more than seven percent higher.

One thing that stands out about the new hires is their many years of service with Inditex, which ranges from six years to as many as 18 years.

"All these people certainly have a fast-fashion DNA, but can they change the culture of a company on their own?" said Joaquin Villalba, who was former head of European logistics operations at Inditex and worked with Martinez.

THE MIT CONNECTION

Much of Inditex's success can be attributed to its tightly controlled distribution system that sends tens of thousands of garments a day from distribution centers in Spain to more than 6,100 stores in some 86 countries.

The speed of the system, which uses sophisticated software and robots to process and pack orders, helps it to respond to catwalk trends as fast as within a fortnight.

It's a strategy that the company has fine-tuned over the years in partnership with the Massachusetts Institute of Technology's LGO MBA program in the United States and is a strategy that Martinez worked to refine shortly before he left the company.

"Instinct has been used to make many pertinent decisions, from design to distribution. Design is difficult to measure, but distribution is not; analytics lie behind many distribution processes in the retail world," said Villalba, who founded mStore Operations, a business application for smartphones that supports fast-fashion processes like ordering and restocking.

Rachel Kelley, the author of an MIT thesis on transferring clothes between stores, said Martinez mentored her during her six-month internship at Zara and set her the task of creating a mathematical model to make re-stocking more efficient.

"He had a very clear vision for the project," said Kelley, who expects her new model to earn Inditex an additional $18 million per year in profit. "He knows where he wants Esprit to go and how he wants to redesign the supply chain, and I think that's why he'll achieve it."

Martinez has already moved to get clothes on racks more quickly.

"We have already invested in a state of the art, fully automated distribution center in Mönchengladbach, Germany," he told Reuters. "Additional investment may likely be required in warehousing space to implement a more ambitious stock replenishment model."

($1 = 7.7527 Hong Kong dollars)

(Reporting by Sarah Morris in MADRID and Clare Baldwin in HONG KONG; Editing by Anne Marie Roantree and Miral Fahmy)